Early in 2007 I developed a fairly simple trend following system. It’s a reflection of how I look at the investment world and covers Stocks (S&P, Nasdaq), Bonds (30yr, 10yr), Currencies (Dollar, Yen, Euro, Sterling), and Commodities (Oil, Gold). I’ve maintained signals on it ever since, although I’ve never been able to trade off them as I’d always been regulated and registered as a broker. Pity, because it’s annualized 12.6% since inception.
One of the things about it that has always appealed to me is that it takes signals when I wouldn’t. When I say that I really mean the old me, the sales trader who fancied himself as a fund manager, the prop trader sitting on a desk at Lehman who was instilled with a need to be right, and who didn’t yet understand that some of the most successful fund managers out there only win about 40% of the time, but the size of their winners far outweigh their losers. They’re called trend followers.
Once you’re comfortable with a trend following system that suits your personality and trading style the hard bit is having the discipline to execute it. (That in itself is actually an edge, and a topic for another post.) You already know it’s a system with a positive expectancy but when you’ve watched something climb inexorably and the old you is saying ‘I think we could be close to a top here’, guess what, ping! Here’s a buy signal from your trend-following system. OMG. Seriously? I can’t believe it’s telling me to buy this thing here…
Take crude oil. This is the system that watched oil climb until it had nearly touched $100 for the first time in history and went ping! – long above $99 and got stopped out two weeks later for a small loss. (It later got back in at $91 and rode it to $121). And it’s the same system that watched crude slide from near $150 and just as everyone was calling for a bottom, ping! – short at $82, and covered near the low at $45, nice, crowd wrong, system right.
That’s why I like it, it’s counter-intuitive to my old self, it’s not contrarian in that it’s not picking tops or bottoms, it’s going with a well-established trend just as many consider it may be ending. I’ve seen it happen so many times now it amuses me. I actually welcome the conflict it presents because I know if the system is wrong it won’t cost me much, if it’s right it could be big. It reminds me to go with what I’ve built and know to be right. In fact you get so used to your own system you start to know when it’s likely to trigger, which I personally think is a very welcome sign because you are probably on your way to achieving the ultimate; being a rules-based discretionary trader.
For the record the same system is currently long crude oil at 91.78, long euro at 1.3261, short sterling at 1.5828, short yen at 1.2252.
It’s either wrong small and quickly, or it’s right large and slowly.
And what did it trigger Sunday night as the futures opened? Long S&P futures.
It may be right, it may be wrong, it really doesn’t matter either way to me, it’s just one trade within an overall winning system, but it came as no surprise just as many are calling for a top, that all I heard was that familiar ping! right on cue.